Ingredion Inc (INGR) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to the Corn Products third-quarter earnings call. This call is being recorded.

At this time I will turn the call over to John Barry. Please go ahead.

Thank you, Mark. Good morning, everyone, and welcome to Corn Products International's conference call to discuss our 2009 third-quarter financial results that were announced earlier today. I am John Berry, Vice President of Investor Relations for Corn Products International. Joining me today to lead the call are Ilene Gordon, our Chairman, President, and Chief Executive Officer, and Cheryl Beebe, our Chief Financial Officer.

This is an open conference call simultaneously broadcast on our website at www.cornproducts.com. The charts for our presentation this morning can be viewed and are downloadable from our website, and they are always available about 60 minutes before our conference call. Those of you using the website broadcast mode for this conference call are on listen mode only.

Ilene Gordon and Cheryl Beebe will deliver this morning's presentations. They will indicate as they move from chart to chart so that those of you using our slides from the website can easily follow the presentation. I have just shifted to chart two, which is our agenda.

Ilene Gordon will provide a general strategy update and an overview of our Q3 performance and the business outlook and guidance for Q4. Following that Cheryl Beebe will present the financials for the third quarter with appropriate analysis and flavor. We will then move on to your questions.

I have now shifted to chart three, our forward-looking statement. Our comments within this presentation may contain forward-looking statements. These statements are subject to various risks and uncertainties. Actual results could differ materially from those predicted in those forward-looking statements and Corn Products International is under no obligation to update them in the future as or if circumstances change.

Additional information concerning factors that could cause actual results to differ materially from those discussed during today's conference call or in this morning's earnings press release can be found in the Company's most recently filed annual report on Form 10-K and reports 10-Q and 8-K.

Finally, statistical and financial information and reconciliations of non-GAAP numbers from this presentation are also available on our website at www.cornproducts.com, and as you will see are included in an appendix to this morning's slide presentation.

Moving to chart four I am now pleased to turn the conference call over to Ilene.

Thanks, John. Good morning, everyone, and thank you for joining our third-quarter earnings call. I want to give you a brief progress update on our strategic planning process and then provide an overview of our business performance in the third quarter and the outlook for the balance of the year. Please turn to chart five.

I have had another three months to review our operations and meet with customers. I continue to be impressed with our safety record, the quality of our management team, and our operations. Despite some volatility caused by swings in currencies and fluctuating commodity prices, I believe we have a very good business model that can generate good shareholder returns and strong cash flow.

But there is always room for improvement. Following the example of our South American business we need more focus on product innovation and markets. As a first step in that direction we recently reorganized our United States and Canadian business to be better aligned with the markets we serve. Business managers will have responsibility for the strategies, tactics, and profitability of their particular markets. Additionally, we have fully integrated our US Canada Health Nutrition and Specialty Products groups.

Moving on to chart six. We have completed a fairly granular review of our current business to get a clear, fact-based understanding of our economic profit drivers by country, market, and product line. This process has served to confirm the success of our previous strategy and much of what our very experienced management team believed. This process has also given me a strong foundation for conversations with our Board of Directors.

As the management team, we have a clear view of the business opportunities available to us and therefore where our priorities should lie. We are also identifying additional opportunities and investment alternatives. We are currently in the process of analyzing those potential investments and opportunities to narrow our list down to those alternatives that we expect to deliver the highest economic profit and shareholder value.

Later this quarter we will be reviewing our planned recommendations with our Board of Directors. At this point we do not expect a radical departure from what has been a very successful business model, rather we expect that our plan will prioritize those options we think may provide the greatest returns to our shareholders.

I am also pleased to announce that we expect to host an Analyst Day in New York City on March 23, 2010, at which time we will provide more details around our strategy. So please save the date.

I will now cover our third-quarter performance and the outlook for the balance of the year. Moving on to chart seven. While down from the record $1.15 EPS we reported last year, our third-quarter EPS of $0.70 was the fourth-best quarter in our history. We saw a significant rebound during the third quarter as we had worked through higher corn costs in the first half of the year. Our volumes continued to show weakness and foreign currencies were still weaker than last year's third quarter.

At chart eight, on a total company basis our third-quarter 2009 volumes were down 2.4% from third quarter last year. South American volumes recovered nicely, led by Brazil and the Andean region. South America's third-quarter volumes not only showed 2009 sequential improvement, but growth over 2008. Most encouraging is that the growth over 2008 accelerated as we moved through the third quarter.

In North America and Asia/Africa the volume recovery is progressing slowly. North America's volumes were down 5.7% from third quarter 2008. The Mexican volumes improved led by high fructose corn syrup and we had better volumes across most of the categories in Mexico.

Asia/Africa's third-quarter 2009 volumes were flat compared to last year. We saw a recovery of high fructose corn syrup volumes in South Korea. Offsetting South Korea, however, was a decline in Pakistan. The Pakistani government's power rationing program continued to impact our customers limiting demand and take away.

Moving on to chart nine with the business performance in the third quarter we are narrowing our full-year earnings guidance to $1.80 to $2.00 per share, excluding the impact of impairment and restructuring charges.

I will now turn the call over to Cheryl for a review of the third-quarter numbers. Cheryl?

Thank you, Ilene. The third quarter represents our most difficult comparison against last year given the outstanding 2008 results. While our numbers are down from the same period last year, they show significant sequential improvement from the previous two quarters. Quarterly EPS was $0.70 in Q3 versus $0.34 in Q2. Obviously excluding the after-tax impact of the impairment and restructuring charges we took in the second quarter and $0.22 in Q1. As Ilene, already stated this was our fourth-best quarter on record.

In general volumes were still challenging, especially in North America. Net corn costs were significantly higher than last year largely due to lower corn oil prices. Foreign currencies, while stronger than Q2, were still significantly devalued from last year.

Turning to chart the 11, our summary income statement for the quarter ended September 30, 2009. Net sales of $971 million were down 10% or $113 million from last year. Approximately 62% of the net sales decline is attributable to lower co-product values. The impact of co-products and volumes can be seen in the gross profit line which declined 25% to $153 million from $204 million last year.

Gross corn costs per ton were down 5% from the same quarter last year while net corn costs per ton increased 12%. Gross profit margins were 15.8%, down from 18.8% last year but sequentially improved from 11.2% and 12.2% in the first and second quarters of 2009. Operating expenses for the quarter were $66 million, down 1% or $1 million from the same period last year.

The operating income for the quarter was $88 million compared to $148 million last year. 2008 Q3 operating income included $4 million from an insurance settlement and a $3 million gain from a land sale. Net financing costs were $9 million, down $1 million from last year due to $3 million lower net interest expense offset by a $2 million unfavorable foreign currency swing. The third-quarter tax rate of 31.2% was down from 34.9% last year reflecting an effective tax rate of 34% partially offset by approximately $2 million in discrete items this quarter.

The net income for the quarter was $53 million or $0.70 per diluted common share compared to $88 million or $1.15 per share last year. The weighted average shares outstanding in the third quarter of 2009 declined 1% to 75.7 million shares from 76.3 million shares in the same quarter last year.

Turning to chart 12, net sales by geographic segment. We see North America's net sales declined about 9% or $61 million against the same quarter last year, while South America declined 11% or $34 million and Asia/Africa declined 15% or $18 million for again a total company decline of 10% or $113 million.

Moving to chart 13, net sales variance, we see North America's drop of 9.4% came from a volume decline of about 5.7% or $38 million, a negative price product mix of 2.8% or $18 million, and a negative 0.9% from weaker Canadian dollar for a negative $5 million, the decline in price mix that was due to co-products which declined by approximately $34 million compared to the same quarter last year.

Excluding the impact of co-products, sweetener and starch price mix was positive compared to the prior year. South America declined 11.1% or $34 million mainly from currencies. Volumes improved 4.2% or about $13 million. Price mix was a negative 4.4% or $14 million reflecting lower net corn costs and the exchange rate impact was a negative 10.9% or $33 million.

Asia/Africa declined 15% or $18 million from lower exchange rates of about 9.6% or $12 million. Lower price mix of 5.1% or $6 million reflecting lower net corn costs and marginally weaker volumes. Volume improvement in South Korea was largely offset by weakness in Pakistan.

I am now moving to chart 14, operating income by geographic segment. We can see that versus the same quarter last year the North American operating income declined 42% or $44 million. The biggest impact on North America's operating income was a 46% increase in net corn costs reflecting the significantly lower benefit this quarter from corn oil, corn gluten feed, and corn gluten meal prices versus last year and the 5.7% lower volumes than Q3 '08.

South America's operating income was down 15% or $7 million from Q3 '08 largely due to weaker currencies. Last year's operating income included a $3 million gain from a land sale.

Asia/Africa's operating income dropped 63% or $6 million due to weaker gross profit margins throughout the region caused by the weak pricing environment in South Korea and Southeast Asia and the weaker demand in Pakistan, China, and Kenya. Corporate expenses were up 28%, the increase was primarily due to the mark-to-market impact of $1.6 million on the deferred compensation program and $1.2 million amortization of equity grants.

I am now on to chart 15, estimated sources of diluted earnings per share. We can see that the impact of changes from operations of a negative $0.51 as price margins declined $0.11, co-product recoveries were a negative $0.21, exchange rate was a negative $0.06, volume was a negative $0.04, and the change in other income/expense was a negative $0.09. Non-operating changes added $0.06 -- $0.04 from a lower effective tax rate and $0.01 each from changes in non-controlling interests and shares outstanding.

Turning to the cash flow highlights for the first nine months of 2009, chart 16, cash flow from operations was $368 million. The net loss of $11 million for the period was offset by the non-cash nature of the $124 million write off of impaired assets taken in the second quarter.

We saw a positive swing in our working capital number of $154 million, we fulfilled business contracts for firm priced business, and we recovered $121 million from our margin accounts. We invested $98 million in fixed assets. Cash used for financing activities reflects $180 million decrease in debt and $34 million in dividend payments.

Chart 17 shows our key metrics. Debt to cap was 29%, down from 29.4% last year. The debt to adjusted EBITDA on a trailing 12-month basis was 1.9 times versus 1.2 times last year. Operating working capital as a percent of net sales was 11.7% or on a dollar basis $424 million and shows the improvement versus last year.

Net debt was $534 million versus $612 million last year and $759 million at year-end. We paid off the $150 million in long-term bonds due August 15, 2009, on their due date. We continue to expect cash flow from operations in the range of $425 million to $525 million in 2009.

We continue to maintain a strong balance sheet and we are well-positioned for 2010. We expect to keep our capital expenditures at approximately $150 million in 2009 with $98 million spent in the first nine months. As we have said before, much of the capital this year represents projects carried over from 2008.

Ilene and I will now take your questions.

(Operator Instructions) David Driscoll, Citi Investment Research.

Thanks a lot. Good morning, everyone. A couple of questions here; just wanted to start off with North America and then go over to South Korea. In North America the sequential volume, it didn't improve quite perhaps as much as I thought it would. My belief here was that the improvement in industrial production combined with -- I believe it was on the first couple of conference calls you guys called out inventory destocking.

So with the resumption of industrial production inventory restocking seemed like it should have happened. Yet when I just look at the year-over-year changes and the volume numbers on a sequential basis you can't see anything. It doesn't look like there is any change there. Can you give me some thoughts around this and maybe a bit more color as to what is happening in the volume side in North America?

Yes, David, it's Ilene. I think that there is a couple of trends going on here. We have studied the, as an example, the corrugated trends. And it's interesting, when we looked back in June we thought that we saw some trends that that was turning around in terms of the shipments of corrugated boxes. Certainly, we ship our products to both paper and the corrugators.

But if you look at the data that has come out from the Fiber Box Association, volumes continued to decline year-over-year and that even year-to-date the box shipments are down 9.8%. So I will say that September was down 4.8% year-over-year, though I understand September 2008 was a particularly low year. So while in the summer we thought we saw some glimmer of those shipments coming up, I continue to see weakness in that whole industrial area.

And then if you look at the beverage and food area, of course, we are seeing some improvements in high fructose corn syrup, as you know, especially with the shipments down into Mexico because of high sugar prices. But when I look at shipments of our other products into the food industry, I still see not a lot of improvement. If you read the reports of the food companies, it's still a little bit lackluster.

I do think that people are still in the mode of trading down, going to private label, and maybe we will see a move to mid-price restaurants away from fast food. But a lot of that has not happened yet.

Dave, you are absolutely right. We were looking at the end of the second quarter we were looking for or anticipating the second half to be 4% below last year. Obviously, the North American volumes were down more than that which is, again, part of why we have narrowed this range.

Okay. That was great color. In South Korea specifically you made comments here that you were seeing a pickup in volumes there. In the second quarter you took the big write-off of your South Korean assets so can you talk to me a little bit about that environment? Has it changed materially and do you expect to see a significant pickup in HFCS consumption continuing or did you just get a one-step-up bump here in Q3?

Dave, I think what we are seeing in South Korea is we are seeing a slow improvement in high fructose corn syrup demand. And obviously, again, with high sugar there the customers are moving over to high fructose. So we think that will continue to be a gradual improvement over the next 12 months. So I don't think the economy there is more robust than we see in some of the other mature economies, such as in North America.

So I would say that we are seeing a slow improvement. We are feeling better about the situation there. Certainly our position there is positive, but it's not the fast growth that you might see over in China and some of the areas of Asia.

Maybe I should have asked can you just give me a sense as to what the gap is between fructose and sugar prices in South Korea, at this point given spot prices?

Dave, that is a little bit challenging to do. It's still favorable, fructose pricing would be favorable, but as you said we took the write-off of the intangibles or the goodwill in the second quarter. We are not expecting to get the full fructose volume back that we have had in the past. And what we have seen why it was sequentially improved in the third quarter it's still not as robust as we would expect. We are only getting the secondary brands back.

Understood. Thanks for all the questions. I will pass it on and get back in the queue.

Vincent Andrews, Morgan Stanley.

Good morning, everyone. Wondering if we can kind of start to take a little bit of a look forward into next year, and I am just wondering if you can comment at all, based on where things are today, whether you think your operating profit per unit overall is likely to increase?

That would be the ultimate forward-looking statement, Vince. Let's talk about things that would improve unit pricing. If we look at the corn costs today using the strip, they are about equal to what they were a year ago. Currencies are bopping all over the place, but they are more favorable than what we have seen through the first nine months of 2009.

Volume, I don't think anybody is ready to make comments on volume for 2010. I think we would all like to be optimistic that the economic recovery will speed up in 2010, but it's still a bit early to be making any forecast on it.

Okay. Maybe then we could dig a little bit into plant utilization. With volume trends continuing to be down at what point do you, from a utilization perspective, start to -- your unit cost or your fixed cost or however you want to look at it -- start to get onerous if volume continues decline like this?

Well, I think we are operating at a level now with the opportunity to ship high fructose corn syrup into Mexico. Where our plants are all operating -- we could ship more volume, but they are all operating pretty well. True utilization this year is not as strong as it was a year ago, but I think that we see the opportunity going forward, we see that eventually the volume is going to pick up again.

It's really -- what I think what everybody is waiting for is when is it going to happen. So maybe when the food companies and the people start buying food and the jobs are created that is the period where we are going to start to see the pickup. But I see that it's several months off.

Okay. Maybe last question before I pass it on. Ilene, you talked a little bit about private label, the trend towards use of private label affecting you, and then how some of the shifts in the out-of-home dining are affecting you. Maybe you can just walk us through -- it's unclear to me at first blush why somebody buying private label versus a branded product would impact you.

And then I would imagine your best served if people are eating more McDonald's because they are probably consuming more Coca-Cola there. But just help us understand how you benefit or don't benefit from shifts in out-of-home dining.

Well, I would say two things. First of all, private label purchases buy our products in the food area, so we benefit from both private label and the branded. Now if you go to the beverage side obviously there is a different mix of product being bought by private label beverage companies versus the branded, and so it just changes the mix of what we sell.

In terms of the restaurant side, actually in the mid-price restaurants -- there are more ingredients purchased in the mid-priced restaurants that would help us, whereas in the higher-end restaurants obviously it's a different level of cooking. And in the fast food side of the business it's -- again it's not necessarily our products. So at the mid-size there is lots more batterers bought, sauces, and solutions that use our ingredients so we feel that that trend will help our business.

Okay, thank you. I will pass it along.

Christina McGlone, Deutsche Bank.

Thank you. Good morning. I just wanted to explore the volume a bit, because I know, Cheryl, you said it's too early obviously for next year. But if demand were to hold steady so you didn't have any pickup in casual dining or pickup in branded food and beverage, but yet we see the pickup in volumes to Mexico and also less competition from Mexico's sugar coming into the US, wouldn't that be a positive environment for your volumes?

Well, it would be in that we are all trying to ship more down into Mexico. But the other thing I would say -- we spend a lot of time talking about North America, but South America is an important part of our business. And I am very excited about what I see going on in Brazil and Argentina and Columbia and that the demand there -- the brewers are ordering quite a lot of products. And as I said in my comments, it's accelerating so I think we are on the upswing certainly in South America.

In North America we will get a little bit of uptick from the Mexico piece. Hopefully the North American and the US piece will come back, but we just don't see the US piece increasing right now.

So, Ilene, am I wrong in thinking that there will be less competition for Mexican sugar? Because if you look it looks like Mexican sugar has eroded some HFCS 42 share and that if we don't have that sugar coming in then you can see 42 volumes grow. Am I wrong in thinking that way?

Christina, I don't know that we have seen the impact of Mexican sugar eroding the 42 volume in the US. That is your question, is it not?

Yes.

What we have seen is more just the lack of consumption. And 42 winds up going in to the canning industry, whether it's fruits or vegetables or sauces, and we haven't seen the competition from sugar there.

Okay. And then I guess last question, co-products seem to be a little bit better than I expected this quarter. Are you still looking for a negative 120 to 140 for the year?

No, it's actually narrowing. As you probably know, the meal prices and the oil prices are actually better at today's prices than they were in the fourth quarter of 2008. So if you look at the way the co-products went this year we had $0.28 in the first quarter, $0.47 in the second, $0.21 in the third, and it's conceivable that we could actually see the swing in the fourth quarter where we would actually have a positive by a couple of pennies.

Okay. So even with better co-products, better FX the guidance really just tightened, it didn't improve at all? And is that because of volumes?

That is correct. If you look at what our forecast had in the second quarter, the outlook was for North American volume, while we expected them to be down, we expected them to be down by around 4%. And we are running at 5.7%.

The swing in the Asian volumes, we expected to see low double digits as the HFCS sales in Korea returned in the third quarter. What we actually saw happen was that the demand in Pakistan because of the power rationing by the government to all industries has really dampened the demand. And so the increase that we saw in Pakistan was basically mitigated by the decline we saw in Pakistan.

Okay, thank you very much.

Christine McCracken, Cleveland Research.

Good morning. A quick follow-up, I guess, just on the Pakistan situation. Did you mention whether or not those policies were continuing or is that something that is hard to predict or is that getting better?

Well, the power outages are continuing and we think it's going to take another six or eight months to work itself through in the country and that it investments in infrastructure weren't made to keep up with demand. And so we are experiencing on the order of four hours a day where power is not available and we have to be very creative on how we move our utilization time around. And the same thing is happening to our customers.

So we think that the infrastructure that is being built will come online slowly and will be out of this by next June.

And then we have seen a lot of volatility in the corn markets here recently, a lot of concerns about the harvest even though it's expected to be record large I guess. Last time we got into this situation you saw some of your customers, I think, start to get a little nervous and come to you a little earlier than they had in the past. Have you seen anybody come to you starting the process of negotiating for high fructose?

I would say it's still too early in contracting to know that. I read the corn reports like you do and I get 28% is harvested. I think there were some customers who were getting ready, but again it's too early to say will they make it happen.

And then just lastly I guess on the reorg in North America, any color around whether or not we could expect some cost saves out of that? Maybe just a little bit more around that or is that something you are going to cover at the Analyst Day in March?

Well, we will cover more when we talk about the strategy, but it's definitely not a move to save money. It's to grow the business. By reorganizing and focusing teams on the dairy business for health and nutrition or the pharma or confectionery we believe that we will have opportunities to bring our ingredient strategy and solutions provider to our customers and add more value.

So it's all about growing in the areas where there are growth opportunities, rather than any type of particular cost savings. The end result is if we sell more business our plants will be more efficient, but the goal is really to grow where there are opportunities.

And is that going to require any additional talent, do you expect, or is that kind of still too early to tell?

Well, we have moved some talent around. We have some very good people and refocused some people, but we have also had some opportunities to bring in some outside talent in some key marketing spots. So we are in the process of doing that.

I will leave it there. Thanks.

Ken Zaslow, BMO Capital Markets.

Good morning, everyone. Just a couple of I think easy ones. The Pakistan impact, how much was that on EPS?

We didn't break it out.

Was a big, small, or medium?

Well, you can look at the change in the operating income for Asia/Africa and a fair portion of that change or a piece of that, not a fair portion but a piece of that, is related to Pakistan. We don't break out the individual companies operating --

I understand that I just didn't know if -- because it seems to be something that is I wouldn't say one-time in nature, but it will last three years and it will be gone. That is I wanted to figure out what actual earnings power is, I guess, is why was trying to get at. That is why was trying to get.

Let me think about it, Ken, and see if there is a way to answer it.

Okay, great. Did you say you have not started contracting for high fructose corn syrup this year yet?

No, I don't think that is what Ilene said. She said it was too early to comment on the contracting season.

Okay, but you have started.

Yes. Yes, it has started but, again, it's early stages. It's too early to say how it will come out, but it has definitely started.

Okay, all right. I guess the other issue is South American pricing, can you talk about how long it's going to take to start to see your ability to get pricing in South America to offset the recent foreign currency hedge? Is this still a couple of quarters back are you seeing any sort of positive -- can you just give us a little way of thinking about it?

Ken, if I think about the rate at which corn has declined versus the change in the price mix, as we show on a third-quarter net sales variance the price mix for South America was 4.4% negative. Yet when you look at the body of the press release you see that the net corn costs were actually favorable so that says we do have pricing power.

And I think relative to where the real is today versus where it was in the fourth quarter it will work itself out as we go through the last quarter of this year and into 2010.

So first half of 2010 we may be able to see positive South American pricing?

It's possible.

Is it probable?

I don't that I am willing to make that forward-looking statement yet.

Okay. Again, over time you guys are usually able to get the pricing through and this quarter is still negative. I didn't now if there would be an inflection point in first half of this year? Are we still going to wait? I am just kind of getting a base number. I am not going to hold you to the exact.

Ken, if everything stayed equal from today we would see favorable price mix given the fact that currencies have revalued or the currency has revalued for the Brazilian real and the Colombian peso. And so just on a comp basis from where they stand today and nothing else moved you would see a favorable trend.

Okay. How much is natural gas part of your cost of goods sold?

I don't think we have ever broken it out. It impacts the North American numbers more so than the Asian/African or the South American. As you recall, our three Canadian plants are all natural gas. Argo runs natural gas and our Mexican plant runs natural gas.

I know, as you said, it's not large but the reduction in natural gas prices have been pretty large. Have you seen a material benefit from that?

No, because as you will recall, we are hedgers. So we are not seeing a benefit in the 2009 numbers.

But 2010 you would?

I would expect where we were not hedged we would see a benefit.

Okay, great. Thank you very much.

Heather Jones, BB&T Capital Markets.

Good morning. A few quick questions. One, going back to US question or North American question I should say, given that -- I believe you said that Mexico improved during the quarter. My impression was Mexico was up year-on-year for the quarter, is that correct?

That is correct.

So US and Canada worsened during Q3?

Yes.

And you mentioned the industrial side, and if I remember correctly industrial is not a huge component of the US. So did the food and beverage side for the USA and Canada was that where the worsening was? If you could just give us more color about what happened during the quarter?

The US Canadian numbers were down almost across the board, whether we are talking paper corrugated processed foods, beverage. If I look at the entire North American, what we had was only two segments that were up and that was obviously the beverage, and that is the Mexican situation, and bakery was positive. Everybody else, all other market segments were basically down.

And did they all weaken across the board sequentially as well, or did one category weaken more than the other?

No, I think they are all basically -- they all are down and there hasn't been the sequential improvement that we were hoping for.

But there wasn't a sequential decrease.

Correct.

But there was a sequential worsening on a year-over-year basis?

No.

Because I mean --

And you are talking on the second -- Heather, let me just make sure. You are talking versus the second quarter?

Well, yes. I have that volume for North America was down 5.7 on year-on-year basis in Q2, similar to Q3 but yet Mexico was up on a year-on-year. So it sounds as if on a year-on-year basis US and Canada did get worse.

That is correct.

So what I am asking as that year-on-year deterioration is getting worse was that broad-based across all the categories or was it one category in particular getting worse on a year-on-year?

No, it's broad-based.

Okay. Then going to -- and just to finish up that conversation, the US and Canada did that improve as we went through the quarter or was September just as weak as July?

Heather, we don't typically look at the numbers on a month-to-month basis. We look at quarter-over-quarter.

Okay. As far as the corn costs, you had mentioned looking towards 2010 that at this point looking at the strip corn costs are essentially equal to a year ago. But if I remember correctly, you locked in a lot of your corn for North America for the '09 year relatively early in '08.

So from that basis, where we see net corn costs currently, where we estimate you must have locked in a fair amount of it for '09 it's still a positive delta if all things stayed equal to where they are now. I was just wondering if you could speak to that.

If all things stay equal, so that would say that there is no pricing give back relative to net corn costs, which there shouldn't be in a rationalized market. And we are talking North America, correct?

Yes.

And so if I look at 2010 relative to the pick up it's going to be -- if pricing stayed the same and our net corn costs are actually better than 2009 then, yes, the comparable would be favorable.

Okay. And then real quick on the opportunity in Mexico, given the pick up there and everything that we are reading would point to pretty tight sugar supplies into the fall of 2010, is it your experience and your expectation that that should keep utilization relatively tight here?

Well, we started looking at what kind of consumption of tons in Mexico might one expect and it's up significantly. If you look at the -- in 2007 the TRQ said that it was 500 tons and we expect that in 2010 to probably double. It will help utilization but of course we have all the different dynamics in North America to deal with at the same time. So I wouldn't expect utilization in 2010 to be worse than 2009 and hopefully better.

And if you add in the last component of that, which is the ethanol, is more favorable today based on oil prices and net corn costs. So hypothetically one would think that between the Mexican demand as well as the blending at the current rates is that things should be pretty balanced.

Well, didn't one of your competitors shut down a plant in June?

One of the competitors earlier in the year shut down a plant which was estimated to be 2% to 3% of the grind.

Okay. And then my final question is the dollar has weakened considerably. It has weakened it seems disproportionately relative to the real. But against most of your currencies, if everything stayed the way it was today, the dollar relative to all those, is it your expectation that you should be able to get back in '10 the negative hit that you experienced during the first three quarters?

If you keep the currencies where they are today and there was no change in pricing then the $0.25, which is the year-to-date number -- $0.10 for the first quarter, $0.09 for the second, and $0.06 in the third -- my answer would be, yes.

Okay. All right, thank you very much.

David Driscoll, Citi Investment Research.

Dave?

Dave?

Yes, sorry about that. Wanted to go back to a couple of follow-ups here on the corn curve. As I recall, Cheryl, last year the contracting did complete earlier than typical and by the end of the third quarter you actually had done a fair amount of contracting. Is my memory accurate on that?

That is correct. If you think about it coming through the third quarter of 2008 before the fourth-quarter decline, is people were concerned that corn costs were going to continue to increase and so they chose to take off their book of business earlier.

Right. Okay, so then we have got two major effects going into 2010. The first one is that as contracting -- if corn prices stay about where they are, the gross corn cost should go down quite significantly. That doesn't say anything about net corn, but the gross corn costs should go down rather significantly. Again, would you agree with that? Am I missing anything?

Correct.

All right. That is fine. So then big picture it looks like 2010 still shapes up to be a much better year. I think you just quantified, and I want to make I get this right, that if things stay constant we get back to $0.25 in foreign exchange hit that we have taken so far this year.

That is correct.

Then if you then add the next part of it, which would be in 2009 I believe, and Cheryl tell me if this is right, but I believe that 2009 goes down as a historically negative deviation between co-products and the gross corn costs that you had locked in in your North American business. Negative meaning that this was a huge negative impact to EPS versus what we would expect on kind of a normal historical relationship between corn and co-products.

I would agree. It's not only 2009, it's 2008 because the 2008 numbers had the co-product credit close to $2.00 and so the normal relationship on a net corn cost recovery tends to be around 30% to 40% versus 50% to 60%. So you have got the year-over-year swing.

Right, right, right. So if we just stop at this point and we say we have got a foreign exchange benefit going into next year and a normalization of the relationship between corn and the co-products, then those two factors alone are enormously positive swing factors to the numbers.

They are with the exception, Dave, is that if you think about where the margin enhancement and margin erosion occurs it's what happens to the co-product from the time at which we book the firm price business.

Right.

And so the year-over-year comparison may not be as attractive as I think you would estimate and it relates to where are those firm price contracts resetting. So if the -- hypothetically if the net corn cost on those firm-price contracts were $3.00 then the pricing was based on $3.00. If net corn costs come down to $2.00, the pricing should reset based upon the $2.00. And then it becomes a question of is there margin enhancement or margin erosion in the pricing model?

Okay, I think I follow.

And remember that we have generally said the book of business in North America is around 50% grain related and 50% firm price. So on a grain related it's going to pass right back through the system.

Right. Okay. Well, I think that we are going to need some more information on contracting to really dial in to exactly the specifics. Would you anticipate that you will have contracts completed by the January conference call?

We would hope so, which will be early February, so we would expect so.

Okay. Well, then we will wait for that time. Thanks for all the answers.

Vincent Andrews, Morgan Stanley.

Thanks for taking the follow-up; just a couple of quick ones. Can I just ask -- I am reading a lot about as the corn crop moves through the harvest there are moisture issues and there are quality issues. From a co-product perspective what effect, if any, will that have on co-product availability or pricing? Also hearing the farmers might delay harvesting through the winter. Is this something that is on your radar screen at all and is it material if any of it takes place?

It's not on the co-products as much it is the question about starch yields. Will you have a degradation in the starch yield because it's taking longer to get the corn crop out of the field? So if you normally have a 66%, 67% starch yield from a bushel, does that decline? And if that does decline then that increases your corn cost.

Okay. And that is something --?

Because you will need more starch to get the same amount of finished product out.

And that obviously would affect you only on 50% of your book of business in the US, right?

That is correct because you go back to the grain related, you would pass that through on a grain related. But on a firm price it would be on our nickel.

And presumably that is something that is being discussed in contracting right now? But it's hard to quantify, right?

It is hard to quantify. I thinking one of the analyst reports out this morning there was a comment about one of our competitors making a comment that they are not looking to necessarily contract until the end of November because of the volatility around this corn crop.

So that is probably broadly consistent with both what buyers and sellers -- probably people want more clarity on that issue.

I would agree.

Okay. And can you give us any sort of sense of if a normal year the starch yield is 60% to 67%, if you go back in the history of wet crops how low that yield has ever been?

Vince, I don't have that number. I don't think we have seen something like this before, but I can go back to our commodity group and see if there is any stats.

Okay. And is there any sort of ballpark concept of how that would affect your cost of goods sold? Or is it just --

I can't quantify it.

Okay. And then my last question would just be in terms of the negotiations this year what you think the most important driver is? Is it going to be the return of industrial demand or where that lies? Or is it going to be how much HFCS is going to go down to Mexico year-over-year or is it something else?

Well, I think it's going to be a combination of food companies looking at their purchases to satisfy demand of the consumers. Certainly the beverage side in terms of the continued shipment to Mexico will be a positive. And as we said earlier, industrial part of the business in terms of paper and corrugated is not a large part of our business. I think that is going to be a slow to come back; it will be a steady.

So what I look to is the opportunity to drive more ingredients in both the beverage and the food and the pharmaceutical side, and that is certainly North America. And then, of course, in South America the brewery business the demand is extremely strong and growing. We are entering to that season and so we see in South America the ability to ship into the brewery industry, and food obviously, is very positive. So I think those are the key factors.

I am just thinking more, and Cheryl you sort of alluded to this earlier when you said in a rational industry price would hold. So I am just trying to isolate across the industry which of those variables is most important to utilization and which would be the one that might cause somebody to make what would appear to the other players to be an irrational decision?

I think we would take -- if you had to pick the one factor it would be the shipments to Mexico. That is certainly something that we are experiencing now that we didn't have a year ago and that is a positive on demand and utilization. So I would say that that is probably the one swing factor that you are looking for.

Okay, thank you very much. Really appreciate the follow-ups.

Operator, we have time for one more question. We are just about running out of time.

Christina McGlone, Deutsche Bank.

A follow-up just to touch on what Vincent was talking about about the state of the crop and the delayed harvest. How should we be thinking about basis because it seems to be unusually firm for this time of year? Is that a headwind at all or is that something that you have already locked in?

It could impact us. If the crop doesn't get out of the field, it could impact basis through November, December. I think it will resolve itself as we get into 2010. But you are absolutely right, basis has moved substantially over the last four weeks.

Okay, thank you, Cheryl.

Okay. Operator, if that was our last question, we are going to close down our conference call and our webcast this morning. As a reminder there is a replay of the webcast at www.cornproducts.com and also an audio conference call replay is available through Tuesday, November 10.

The phone number for the audio replay is 719-457-0820 and the pass code is 6446801. Thank you for participating in this morning's call. Good bye.

Thank you all.

That does conclude our conference call. Thank you for your participation.